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Bankruptcy in the Bakken

Posted on: January 11th, 2016
by David Ganje

Bankruptcy in the Bakken

Oil and gas production is a result of two basic factors: economics and technology. Economics means the costs of production and distribution. The price of oil is an essential element of the economics of production. One economic risk is bankruptcy. A bankruptcy filing, however, is not the same as a “funeral.” People believe what they want to believe. When I taught bankruptcy law, one of the harder things to get across to the students was the fact that a bankruptcy filing is not automatically “the end.” Nevertheless, several of the law students still came into the class carrying that attitude. One should keep in mind that even if a liquidation bankruptcy case is filed, production in the final analysis often continues. The particular chapter of the bankruptcy code filing, North Dakota property law, as well as state and federal regulations all affect a bankruptcy case. There are as many facets to a bankruptcy case as there are facets on a movie star’s wedding ring, however, in this article I will discuss basically the impact of a bankruptcy filing on the typical lessor and royalty holder.

First let us review a couple of things to watch for concerning a possible bankruptcy filing. If you are the lessor or royalty holder and think a producer may be a bankruptcy candidate, there are steps that can be taken. Your attorney can access the so-called watch list as well as access public records for delisted public companies. And a slow, or no, payment of royalties is also a red flag. But do not panic if a bankruptcy filing occurs. The royalty holder should put his energy into keeping good paperwork and records. This will make a bankruptcy experience tolerable.

Property rights created by an oil and gas lease are treated differently in the various states. In North Dakota, the oil and gas lease gives the lessor a real property interest with real property rights. According to the 1986 North Dakota Supreme Court case Nantt v. Puckett Energy Company, “[o]il and gas leases are interests in real property” and have been considered such since 1951. Although an oil and gas lease is not a lease in a landlord and tenant sense, in North Dakota, an operating lease is treated under bankruptcy law as an “unexpired lease.” In Van Sickles v. Hallmark & Associates, a 2013 case, the North Dakota Supreme Court decided that an oil and gas lease in a bankruptcy case must comply with the requirements set forth in section 365 of the bankruptcy code.

Many operators who file bankruptcy are in arrears on royalty payments. A new law goes into effect at the end of February in North Dakota that allows a royalty holder to file a security lien when the royalty has not been paid when due. The royalty owner must file the lien with the state and record the lien in the county where the well is located within 90 days of production to have a lien. With good records and timely filing and recording, mineral interest owners can gain a secured position in a bankruptcy proceeding. This greatly increases a royalty holder’s chances of a full recovery because secured creditors are paid before unsecured creditors.

In bankruptcy, the debtor must either assume or reject an unexpired lease of the debtor. A debtor may not accept only the favorable parts of an executory contract. If the lease is assumed and not in default, the royalty holder can rest easy, because an oil and gas lease must be assumed in full. The royalty owner will continue to reap the benefits of the contract. If the lease is in default, the debtor must cure the default in order to keep the lease. Therefore, if a bankrupt debtor is delinquent on royalty payments, the debtor must pay the back royalties if they want to assume the lease. Either way, the royalty owner gets paid, at least eventually. However, the bankruptcy court must approve any assumption of a lease. In this circumstances, the court will look to whether the lease is a valuable asset to the debtor and whether its preservation is sufficiently important. A royalty holder or lessor may also request that the court order the debtor to decide whether to assume or reject the lease within a specified period of time. A bankruptcy court can rule that preventing further delay with respect to assumption or rejection is in the best interest of all the parties.

Following a bankruptcy, a royalty holder or lessor may find themselves with the new option of leasing to a different producer. If a debtor elects to reject an oil and gas lease, the lease is no longer valid and the mineral interest is again available on the open market. Another way this could happen is if a producer is in default of the lease agreement. The North Dakota legislature states in N.D.C.C. Sec. 47-16-39.1 that the obligation to pay royalties is “of the essence” in an oil and gas lease and that breach of the obligation “may constitute grounds for cancellation of the lease.” If a mineral owner shows a bankruptcy court that equity requires it, the court may cancel the contract and the mineral owner may then lease to another party. In addition to the statute, some lease agreements contain a provision allowing a landowner to terminate the lease under certain conditions. This avoids the equity power of the court in favor of contract language regarding cancellation. If the terms of the lease are breached in this way, a landowner may be able to terminate the existing lease and sign a lease with another producer.

Pipeline Easements in New York

Posted on: January 8th, 2016
by David Ganje

Pipeline Easements in New York

As natural gas exploration and production has increased, so too has the need to overhaul and expand the natural gas transportation system. Currently, there plans are under way pipe-in shale natural gas being extracted in neighboring Pennsylvania.

In late-November, Kinder-Morgan, the Northeast Energy Direct (“NED”) Pipeline operator, filed a certificate application with the Federal Energy Regulatory Commission (“FERC”) in int’s effort to begin construction at the beginning of 2017, and make the pipeline operational by the end of 2018. While Kinder Morgan says most of the pipeline would be co-located with existing utility lines, many of these corridors would need to be widened, resulting in impacts to private property.

In the case of the NED, scores of privately-owned parcels will have to be crossed along the pipelines route through New York State. In order to facilitate construction of the pipeline, the operators behind the NED and Constitution Pipelines will negotiate easements with the owners of these parcels.

The relationship between public utilities and negotiated easements is nothing new. Easements may be granted to private businesses, such as a public utility company, to cross a land parcel in order to provide common services such as sewer access or electricity. Natural gas pipeline easements present a different situation. Setting aside for the moment the issue of whether the pipelines are a good thing economically and environmentally for the state, affected landowners should tread carefully.

Unlike a public utility easement, a natural gas pipeline moves product for profit across land rather than providing a direct benefit to the land. At peak capacity, millions of dollars worth of natural gas will be moving through these pipelines every day. Are affected landowners receiving fair compensation?

Traditionally in these situations, landowners receive “market value” of the land affected by an easement, which often includes money for reduction in agriculture output or other productive use of the land.

While this system makes sense under the common public utility easement paradigm, how does this process apply when the landowner’s property is the “transportation vehicle” for a commodity? How does one calculate “fair market value” when millions of dollars worth of product are flowing across privately-held land? Is a one-time payment for an easement fair compensation?

The term eminent domain should raise a red flag with any landowner along a pipeline’s proposed route. Eminent domain means “forced taking” though litigation. Under the doctrine of eminent domain, private property may be seized so long as the seizure is for a public purpose, and fair compensation is provided.

The concept of “public purpose” is liberally construed under the law. So, a seizure of property for a pipeline could be for a public purpose even when the direct benefactor is a private company. “Fair compensation” typically means that the taking party must provide market rate for the seized or affected land. In such cases, the focus is on production loss to the landowner rather than benefit provided to the operator.

Forty-two states have enacted new legislation or passed ballot measures since 2006 concerning problems with eminent domain as a taking of private property. Compensation to landowners in eminent domain proceedings has been notoriously small in amount. However, five states have recently enacted legislation increasing the compensation amount.

So, if the easements are coming, for what terms should New York landowners be on the lookout?

When landowners are approached about an easement they are presented with a standard agreement. These agreements will not refer to any individualized needs or considerations. But they do contain many important legal terms.

Some examples of common terms:

-“Temporary periods” are often mentioned. How long is temporary?

-Many agreements give an operator the right to conduct several activities (reconstructing, modifying etc.) at any time. However, the Landowner does not retain the right to renegotiate the type of access allowed. These activities could cause future disturbances to the Landowner’s use and enjoyment of their land. Is the landowner left without any recourse?

-Some agreements allow for the installation of “any appurtenant facilities.” What are these appurtenant facilities? Are they going to impact the Landowner’s use and enjoyment of the land?

While Landowners may feel pressure to sign, that does not mean that they must be left with a bad deal. Any proposed agreement should be reviewed with the help of experienced advisor’s. A landowner should always carefully consider the circumstances of his land and, importantly the future of his land.

Author: David Ganje. David Ganje of Ganje Law Offices practices in the area of natural resources, environmental and commercial law in New York.

Holding Oil & Gas Leases Past Primary Term

Posted on: December 13th, 2015
by David Ganje

This page has moved to ‘Canceling’ An Oil And Gas Lease

Local Commentary: All sides should comment on proposed NED Pipeline

Posted on: October 27th, 2015
by David Ganje

NED Pipeline
ContributedThis map from Kinder Morgan shows the Pennsylvania and New York portions of the route for the company’s proposed Northeast Energy Direct pipeline.

By David Ganje Local Commentary

As demand for natural gas has increased, so too has the need to overhaul the region’s delivery infrastructure. One proposed development is the Northeast Energy Development Pipeline, which will connect the natural gas fields of Pennsylvania to the New York Capital Region, before continuing on to connect with Boston and other parts of New England.

The proposed NED Pipeline is currently under review by the Federal Energy Regulatory Commission. As part of the review process, FERC considers a variety of factors, including public commentary. Originally, the NED deadline for accepting public commentary was scheduled to expire on Aug. 31. However, after urging from several sources, including U.S. Senators Charles Schumer and Kirsten Gillibrand, the public commentary period was extended and remains open.

As part of the review process, both FERC and Kinder Morgan have hosted town hall-style meetings where members of the public are able to pose questions directly to officials and various experts. Further, the public is able to submit their commentary directly to FERC through the agency’s website athttps://ferconline.ferc.gov/QuickComment.aspx under docket number PF 14-22-000.

As of Oct. 13, nearly 6,000 comments had been submitted to FERC via the online tool. Comment sources range from civic groups, businesses, and school districts, to various special interest groups, and perhaps most importantly from private citizens.

Public commentary is an important part of FERC’s review process because it allows private citizens and groups to raise individualized concerns. During review, FERC reviews a variety of sources such as professionally prepared environmental or economic impact assessment reports. However, public commentary also plays a crucial role in the review process.

FERC itself states that public commentary raises issues that might otherwise escape notice by the agency, such as:

• “Environmental and socioeconomic resources that are important and should be examined by FERC,”

• “Other alternatives to the proposed project that should be evaluated,”

•  or even “Mitigative measures that they want the FERC to include in any approvals issued.”

Of course, FERC must consider a plurality of interests when reviewing a proposed project, including natural gas pipelines. Private interests and concerns are just one piece of the puzzle, as FERC also owes a duty to serve the broader public interest. However, legitimate and well-presented concerns raised during public commentary have the potential to bring about significant results. This can vary from delaying or extending the review process, to changing a pipeline projects route altogether to avoid sensitive areas that had previously escaped notice.

Public commentary is also the first step toward becoming an “intervener.” During the public commentary phase private citizens with legitimate questions about the NED’s potential impact can seek to have those questions addressed. After raising a question during public commentary, a citizen with lingering questions can go through a more formal process and become an “intervener.” 

To become an intervener, one must prepare and file a Motion to Intervene with FERC. After acceptance by FERC, an official “intervener” may actually appeal a FERC decision in Federal Court should they feel the situation warrants such action. Due to the formal nature of becoming an “intervener,” it is probably wise to seek assistance of counsel.

Public participation is a cornerstone of the democratic process. Public commentary periods are a classic example of empowering the public voice. No matter what one’s personal politics or feelings toward energy development are, participation in the process is always important.

David Ganje, of Ganje Law Offices in Albany, practices in the area of natural resources, environmental and commercial law in New York.

Termination of Oil & Gas Leases

Posted on: October 22nd, 2015
by David Ganje

David L. Ganje, of Ganje Law Offices, has been invited to speak on November 11th at a professional legal education program sponsored by Strafford Publications, Inc. Ganje’s presentation will discuss Termination of Oil & Gas Leases based upon Lack of Production.